Cisco Systems on Thursday said it will acquire software company Splunk for $28 billion in cash. Splunk shares surged on the news but traded well below the takeout price. CSCO stock fell.
Cisco will buy Splunk for $157 per share, a 31% premium to the software firm's closing price on Wednesday.
In February 2022, Cisco reportedly offered to buy Splunk for $20 billion.
CSCO Stock: Shift To Software
The computer networking giant has been shifting to recurring revenue and subscription-based software and services and away from its legacy business of selling switches and routers.
Splunk stock popped 21.3% to 145.02 in midday trading on the stock market today. With the move, SPLK stock traded well below the $157 per share takeout price. Regulators will review the deal for any antitrust issues. Meanwhile, Cisco stock fell 4.1% to 53.24.
With roots in data analytics software, Splunk has expanded into cybersecurity. In addition, it's undergoing a transition to a software-as-a-service business model from on-premise products.
"Our scenario suggests the deal can meet Cisco's targets for margin and cash accretion, but we would not consider it transformational," Raymond James analyst Simon Leopold said in a report.
He added: "We see Splunk as a good strategic fit, and trust Cisco management regarding the cultural fit. Cisco has a stated strategy to increase its software and recurring revenue within the mix, and Splunk fits that vision. The deal valuation appears rich, which reduces the likelihood of other higher bidders."
Cisco Software Acquisitions
The biggest previous software acquisition by Cisco was AppDynamics for $3.7 billion in 2017. In July 2019, Cisco acquired Duo Security for $2.35 billion, marking its biggest cybersecurity acquisition since its purchase of Sourcefire in 2013.
"This acquisition will also allow Cisco to provide a full-stack observability platform," William Blair analyst Jonathan Ho said in a report. "Cisco has historically been strong in infrastructure/network monitoring and AppDynamics is strong in application monitoring. Now Splunk will offer the third leg of Cisco's observability platform in log management."
Under the deal, Cisco would pay a $1.5 billion termination fee if the transaction does not close by March 2025. As part of the agreement, Splunk cannot solicit competing proposals.
SPLK Stock: Q2 Earnings Topped Views
For the second quarter ended July 31, San Francisco-based Splunk reported adjusted earnings of 71 cents per share on revenue of $911 million. That's up from earnings of 9 cents per share on $799 million in sales for the same period last year. SPLK stock analysts polled by FactSet had expected earnings of 46 cents a share on $889 million in sales.
Private equity firm Silver Lake in 2021 made a $1 billion investment via convertible debt in Splunk.
CSCO stock currently holds a Relative Strength Rating of 86 out of a best-possible 99. The best stocks tend to have an RS rating of 80 or better.
Shares have an Accumulation/Distribution Rating of B-, according to IBD MarketSmith analysis. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
As of Wednesday, Cisco stock was extended above a buy zone. On June 13, CSCO stock broke out of a cup-with-handle base at a point of 50.58.
Cisco and Splunk are both on the IBD Tech Leaders list.
Follow Reinhardt Krause on X, formerly Twitter, @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
